4) A convenient way to calculate the compensating variation (CV) 1s to use the expenditure function. Suppose an individual has the utility function: ad . 1=a U(g:.92) = q7q3 1. Solve for quantities (g,,q,) as a function of income and expenditures (income). 4y 40 1. Plug values from part (1) back mto utility function, solving for U as a function of expenditures (income) and prices. ii. Now we want to know necessary expenditures (income level) to maintain utility level U when prices change. To do this, we solve for expenditures as a function of prices and U. a) What 1s the expenditure function of individual facing prices py, p;, and expenditures, E (equivalent to income y}. b) How can we use the expenditure function to calculate the compensating variation? Why is compensating variation useful